2018-06-07

2018 Comparable to 2016 Default Wave

Another article compares the 2018 default wave to 2016 and expects year end defaults could be similar to 2016. If I'm right and a more appropriate comparison is 2014 (or perhaps early 2015) in terms of the credit cycle, then peak defaults in this cycle will far exceed 2016 highs.
Sina: 今年债券违约规模将比肩2016年 需警惕五类企业

The successive defaults in the bond market continued to trigger market-sensitive nerves. Statistics show that as of the end of May, the default size of the bond market this year has approached half of the previous default peak in 2016. It is widely expected in the industry that this year is expected to become the history of the Chinese bond market in the context of tight tightening of the financing environment. In the big year of default, the scale of default in the whole year is expected to be similar to that in 2016.

Affected by the worsening expectation of the bond market, market investors' investment preference is increasingly concentrated on high-rated and short-term bond varieties, while the refinancing pressure of issuers of private enterprises, local governments, and real estate companies has increased significantly, further aggravating default risk. Accumulated in these areas. Therefore, many institutional analysts believe that the control policy portfolio should be changed to "strict supervision + stable currency + structural tight credit" to achieve structural deleveraging under the goal of steady growth.

According to statistics, as of the end of May 2018, a total of 13 issuers defaulted this year, involving a breach of contract of 14.8 billion yuan, close to half of the scale of default in 2016. In 2016, a total of 33 issuers violated the contract, and the scale of default was as high as 33.7 billion yuan.

“This year, the bond market will become the worst year in the history of default, and the default will be normalized. It is expected that the scale of default this year will be about the same as in 2016.” Mao Cheng, director of China Chengxin International Enterprise Rating, told reporters.

Five types of situations are considered at risk for default:

As for how to identify the risk of credit default in the second half of this year, Mao Yu stated that it is necessary to pay attention to five factors: First, there is a high level of external guarantees, there are many related transactions, and the proportion of mortgages is high; second, the debt structure is not reasonable, and the pressure for centralized payment is high; Third, the scale of mergers and acquisitions and foreign investment is large; fourth, the proportion of financing such as bonds, non-standards, and trust products is high; and fifth, financial statements are flawed.

Hu Kai, the senior vice president of Moody's Corporate Finance Department, said that in the future, investors should focus on avoiding two types of issuers. First, the company’s main business is not outstanding, and it is keen to pursue cross-industry operations and pursue capital gains. Second, companies are eager to capture the “wind.” Taking various types of capital, it is taken for granted that maturing debts can be renewed upon expiration.